The Discreet Eroticism of Macroeconomics

For a long time, supply (S) and demand (D) have been intimate co-eds in economics textbooks. Towards the end of the 19th century, the wizard  AM recommended that they experiment the scissors’ position, with semi-open blades, as if searching for an equilibrium between the pain of verticality (P) and the pleasure of horizontality (Q):

In the 1930s, suffering from a great depression, supply and demand started looking for more challenging positions to spice up their relationship. Sir MK proposed that supply should lie passively, letting the demand curve, reinvigorated by government-provided pills, assume the active role of stimulating activity:

——————————————-

Glossary for the uninitiated

AM = Alfred Marshall, English economist, author of Principles of Economics (1890), considered the Bible of economics until the 1930s.

D = symbol for the demand curve for goods and services in the economy. Along the demand curve, the higher the price (P), the smaller in general the quantity demanded (Q).

Fresh waters = Great Lakes region, where the US universities whose economists are close to monetarism are located.

HM = Hyman Minsky, American economist, author of John Maynard Keynes (1975), considered the great theorist of financial crises.

MF = Milton Friedman, American economist, co-author of The Monetary History of the United States, 1867-1960 (1963), considered the father of monetarism.

MK = John Maynard Keynes, English economist, author of The General Theory of Employment, Interest and Money (1936), considered the father of modern macroeconomics.

P = Economy’s price level (or inflation rate). Measured on the vertical axis of the figures in the text.

Q = Economy’s GDP (or employment). Measured on the horizontal axis of the figures in the text.

S = symbol for the supply curve of goods and services in the economy. Along the supply curve, the higher the price (P), the higher in general the quantity supplied (Q).

Salt waters = East and West coasts of the US, where the universities whose economists are close to Keynesianism are located.

Ultra-Fs = Ultra-monetarists (or “neoliberals”).

Ultra-Ks = Ultra-Keynesians (or “developmentalists”).

——————————————-

Following MK’s advice, supply and demand led a fully satisfied relationship for many years. Up until de 1970s, when, hit by an oil shock, the supply curve rebelled, taking on a vertical position. MK’s prescription for greater Q-pleasure through demand stimulation then became a source of pure P-pain:

MK followers from the salt waters recommended government controls to reduce the P-pain. Wary of such controls, supply and demand travelled inland in search of alternatives that would maintain their freedom of movement.

They met the fresh waters’ guru, MF, who gave them a recipe that was the direct opposite of that from MK: demand should take a passive horizontal position, thus keeping P-pain under control. The supply curve should maintain an upright position, expanding at a natural rate free from government’s shackles:

There followed a period of great moderation, with P-pain kept under control and Q-pleasure expanding under the aegis of deregulated financial casinos.

Happy endings, however, are the realm of fairy tales. Since the beginning of the 21st century, demand expansion became increasingly reliant on casino-facilitated credits. As a result of this mania, panic and crash occurred in 2008. Overloaded by debt, demand shrank, no longer able to respond to credit stimuli. Heavily indebted governments  became incapable of providing more stimulant pills. Shrunken and shriveled, the demand curve became erect, leaving a vacuum between its position and that of the supply curve:

Thus mismatched, demand and supply now suffer from excruciating Q-pain, a feeling they had not felt since the 1930s. Pleasure from the fall of P  also eludes them, since it only increases the burden of accumulated debts. The pair now regrets not having paid more attention to HM, the forgotten prophet, who had warned them so vehemently about the dangers of financial casinos.

How can demand and supply be induced to mate again? Old recipes return in times of crisis. Ultra-Ks would settle only for more stimuli, believing that supply will ultimately piggyback on demand wherever it goes. Ultra-Fs, on the other hand, will only go for fewer controls, as they continue to believe that supply generates its own demand.

Better leave the ultras with their foibles and return to the wizard AM’s starting point. It seems best to recognize the individualities of supply and demand, knowing that one cannot live without the other, and aim at restoring their harmonic crossing, as if they were blades of the same scissors. Extreme positions are exciting at times, but the middle way is the only path that leads to liberation.